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Market Extra: Investment-grade corporate bonds head for 5th worst monthly return on record


Debt sold by top companies stumbled to start 2022, with the biggest part of the near $11 trillion U.S. corporate bond market on the cusp of booking its fifth-worst monthly return on record.

Investment-grade corporate bonds, the debt issued by many top S&P 500 SPX, +1.22% companies, were headed for a loss of 3.1% on a total return basis in January, putting the sector on pace for its fifth-worst monthly performance on record (see chart), according to CreditSights.

January 2022 ranks in top 5 worst months for U.S. investment-grade bonds

Worse months from a total return perspective were March 2020, when credit markets lurched in the early part of the pandemic, two months in the 2008 global financial crisis, and in July 2003, according to CreditSights.

Notably, each of those months — except for September 2008 when Lehman Brothers collapsed into bankruptcy — were followed by monthly upswings in performance (see chart).

“HY’s performance is marginally better, ranking at the 16th worst month since January 1997,” Winnie Cisar, global head of strategy at CreditSights wrote, in a Monday note, referring to the high-yield HYG, -0.11% or “junk bond” JNK, -0.08% sector.

Corporate bonds are priced at a spread, or premium, above the relevant Treasury rate TMUBMUSD10Y, 1.778% to help compensate for default risks. Rates volatility also impacts bond performance, particularly with the 10-year Treasury yield climbing more than 25 basis points in January to about 1.79% on Monday.

With that, Cisar isn’t expecting a material rally in spreads for February, considering the relatively small moves in spreads to start 2022, the continued “rotation out of fixed-rate asset classes” by investors, and expectations for a March rate increase.

“However, using history as a guide indicates that the upcoming month may be less challenging from a rates perspective.”

Markets have been in turmoil as Wall Street attempts to adjust to a future of tighter financial conditions, with the Federal Reserve looking to raise rates soon and shrink its near $9 trillion balance sheet to tackle inflation recently pegged near 40-year highs.

See: What to expect from markets in the next six weeks, before the Federal Reserve revamps its easy-money stance

The largest U.S. investment-grade corporate bond exchange-traded fund LQD, +0.07% was down about 3.7% on the year, at last check Monday, while the rate-sensitive Nasdaq Composite COMP, +2.41% was lower by 10%. The S&P 500 SPX, +1.22% was down about 6% on the year, while the Dow Jones Industrial Average DJIA, +0.60% was off roughly 4% in January.

Related: Fed’s George calls for sharp reduction in size of $8.9 trillion balance sheet

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